Building a SaaS Company Based on Your Budget
So you’re thinking about building a SaaS company? You’re about to embark on a potentially joyous experience. It could be the best decision you’re made in your life. Building a SaaS company may also turn into a disaster.
We’ve seen dozens of clients build incredibly successful SaaS businesses. We’ve even built and sold some of our own. What it ultimately amounts to is risk tolerance.
A note on other people’s money (OPM): We are going to assume that you’re using your own funds to build the MVP. Once you have the MVP, it’s up to you whether or not to use OPM. There’s two sides of the coin, and it’s more of a personal preference and depends on the goals of your SaaS company. Regardless of whether you decide to use OPM, we advise bootstrapping the MVP to 10 paying customers.
- Investors will not take you as seriously if you do not have a product to show them. Having built a product is a filter for execution. Angel investors get pitched “ideas” all the time. They want to see some execution. Plus, it gives them a better vision for the product and lowers the risk for them, because they can SEE your execution skills.
- You’ll get a much better valuation. Why not invest a minimal amount of your own capital to retain 50% or more of the shares that you would have sold to an angel? Repeat founders with at least one exit are the exception to this rule. They can raise significant funding with a pitch deck and no product.
Now that you know why we’re making the recommendations we are, let’s get into the execution.
Less than a million dollar net worth
This is the range where you most likely need the most capital.
A significant amount of companies that go on to be successful were started by individuals in this bracket. This is where you hear of the AirBnb-types of the world who throw a few hundred thousand dollars down on a credit card to build their dream.
If you have that appetite for risk, go for it. Unfortunately, for every AirBnB, there’s thousands of companies you’ve never heard of. A graveyard of founders who failed and were left holding the bill. Also, these people were either technical or had a co-founder who was technical and foregoing cash payments to build the product.
Finding a technical co-founder willing to work or equity is position 1, A for people in this net worth bracket. Unfortunately, it’s incredibly difficult to find developers to work for free. Usually you’ll need some form of cash compensation.
We see people in this bracket leverage interns and coding school students. This can work for the MVP phase depending on project difficulty.
If you’re in this bracket, here’s how we recommend executing:
- Create a budget of $10,000. Save this in CASH.
- An idea is very important. What’s more important is a target customer. If you don’t know WHO you’ll be building for, you’re opening yourself up to feature creep and a watered down product. Remember, software development costs scale exponentially, NOT linearly.
- Allocate $2,500 for ad spend.
- Create a logo using Looka.
- Purchase a subscription to a lead generation platform like Instapage. Build a single page landing page that has a call to action of “Start Free Trial”.
- A user should enter their email to start the trial.
- Once the email is entered, redirect them to a thank you page that says something along the lines of, “Thank you for your interest in our service! We’re currently limiting sign ups to keep up with demand.”
- Find a target customer acquisition cost. Run ads using Google, Facebook, or LinkedIn. Your goal is to generate signups for 20% your target customer acquisition cost at this stage. It’s important to understand, MOST people who sign up for your free trial will not pay. Usually 5% or less. Also, the ads you’re running are not going to be your best, so you’re not seeing a true CAC.
- If you see early signs of success, save the rest of your ad budget for post-development. Also, if you don’t see a conversion (email sign up) after spending 5X your target customer acquisition cost, kill the ad campaign and try a new angle.
Assuming you’ve verified that your idea has a somewhat viable customer acquisition cost, you’re ready to move forward with development.
- Purchase a license on a pre-made SaaS template.
- Hire a Ruby on Rails freelancer, and work with them to scope down an MVP to a 30 day workload. Be TRANSPARENT about your budget and REASONABLE with your expectations. You want to spend $7,500 to get your MVP up and start bringing in revenue. Your software will have kinks. You will want to improve. AVOID FEATURE CREEP at all costs. You don’t have the money, yet, to build out a world class SaaS product.
- Deploy your service on AWS and make sure you take advantage of free credits.
Once you finish development, you’re ready to scale. At that point, you’re going one of two routes:
- Bootstrapping: Consistently reinvest income directly into the product. Don’t pull any money out. Money should go towards advertising and product development. Be cognizant of the risk/reward for your product. Most people are delusional.
- OPM: It’s time to start raising. Build that deck and get to work.
Next week we’ll discuss the playbook for when your net worth is $1-10M.